How Does A Home Appraisal Work?
What is a home appraisal? A home appraisal is how a current home value is determined. An appraisal is an unbiased opinion of what a buyer might expect to pay - or a seller receive - for a parcel of real estate, where both buyer and seller are informed parties. To be an informed party, most people turn to a licensed, certified, professional home appraiser to provide them with the most accurate opinion of the market value of their property.
Why You Need A Home Appraisal
A home purchase is the largest, single investment most people will ever make. Whether it's a primary residence, a second vacation home, or an investment - the purchase of real property is a complex financial transaction that requires multiple parties to pull it all off.
So who makes sure the value of the property is in line with the amount being paid?
Most of the people involved are very familiar. The Realtor is the most common face of the home buying/selling transaction, helping facilitate communication between the buyer/seller. When a mortgage company provides the financial capital necessary to fund the home loan, they are the ones responsible for contracting the home appraiser’s services. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.
Ultimately, though, it is the responsibility of the home appraiser to give an opinion of the current market value for the property.
So what goes into a home appraisal and how does it work?
Preparing For A Home Appraisal
Before an appraiser arrives, there are a few things you should know. By law, an appraiser must be state licensed/certified to perform appraisals prepared for federally related transactions. Also by law, you are entitled to receive a copy of the completed appraisal report from your lender.
To facilitate the appraisal process, it's beneficial to have a few documents ready for the appraiser - see the list.
Do I Need To Clean Before The Appraiser Visit?
A clean (or cluttered) home does not affect a home’s value. Appraisers see hundreds of homes a year and will look past most clutter, but they're human beings too! A good impression however, can help form a better opinion.
Do I Need To Do Repairs Before The Appraiser Visit?
A home appraisal is different from a home inspection. A real estate appraiser looks for things that affect the overall value of the house, while a home inspector looks deeper to identify things that need to be fixed before you close.
The short answer is no, you don’t need to do every home repair before an appraisal - but you DO want to have them done before the inspection. There are some exceptions though. Here are the most common repairs that should be addressed before an appraiser visits your property:
- Health and safety issues
- Protecting the security of the property
- Structural soundness of the property
See examples mentioned here.
The Home Appraiser Visit
It all starts with the appraisal inspection. This part of the home appraisal is not the same as a home inspection, even though appraisers use the term "inspection".
A real estate appraiser's duty is to inspect the property being appraised to ascertain the true status of that property. He or she must actually see features, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect.
The inspection often includes a sketch of the property with measurements, ensuring the proper square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features - or defects - that would affect the value of the house.
When you have an appraisal done, the appraiser will not only look around at your home and visit each room, but he or she will be taking pictures of every room. Remember, a home appraiser is collecting evidence to support the final opinion of value they arrive at and it must stand up to USPAP standards and or government entities requirements, if challenged - pictures are a tool to assist the appraiser’s description.
Depending on the size of the home, an appraiser can spend anywhere from 1 to 4+ hours at your home, and additional time at the office completing the appraisal report. Find out more about how long an appraisal takes.
The Appraisal Report
Once the home has been visited and the appraiser does an appraisal inspection, the appraiser uses one to three approaches to determine the value of real property: a sales comparison approach (included on nearly all appraisal reports), a cost approach (typically used in newer homes) and, in the case of a multi-family and/or commercial property, an income approach.
Cost Approach To Determine Home Value
The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This approach is most accurate when a home is newer and there are vacant site sales available to determine site value. In older homes and in areas where vacant site sales are not available this approach is often unreliable.
This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead?
Sales Comparison Approach To Determine Home Value
Appraisers get to know the neighborhoods in which they work. They understand the value of certain features to the residents of that area.They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value.
Then, the appraiser researches recent sales in the vicinity and finds properties which are ''comparable'' to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.
Using knowledge of the value of certain items such as square footage, extra bathrooms, garages, pools, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property.
For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.
The sales approach is typically the most reliable approach to value.
Income Approach To Determine Home Value
In the case of income producing properties – duplexes, tri-plexes and four-plexes for example - the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.
Combining information from all approaches, the appraiser is then ready to stipulate an opinion of market value for the subject property.
It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price.
There are always mitigating factors such as seller motivation, urgency or ''bidding wars'' that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who don't want to loan a buyer more money than the property is actually worth.
After The Appraisal
Once you receive the appraisal, your lender has already received it as well and likely your home sale or home purchase is on it’s way to completion. But many times the homeowners have additional questions.
Quality Ratings
In addition to the home’s value, a quality ratings appear on your home appraisal - but what does it mean and how does an appraiser rate your home? Find out the differences in quality and how an appraiser rates your home here.
What If Your Appraisal Comes In Lower Than You Want?
An appraiser's job is to be impartial on the value of your home. But what if you believe your home is worth more than it was appraised for? First, it's important to consider if your opinion of value is unbiased? Is it what you WANT for the house, or what you KNOW it's worth?
If you still believe your home is worth more than it was appraised for, you can challenge the appraisal. But - you must be prepared to point out mistakes the appraiser made in comparing other properties or by missing new or upgraded features in your home. Read more here.
Need A Home Appraisal In Phoenix, AZ?
We do home appraisals in the Phoenix area including Scottsdale, Chandler, Gilbert, Mesa, San Tan Valley and surrounding areas. We welcome you to look through our website, review appraisal services, join our Facebook community, and learn more about our expert appraisers.
Give us a call to schedule your appraisal.
